World

4:00 am

Mon March 19, 2012

Sanctions' Squeeze On Iran Tightens

U.S. officials think that this may finally be the time that economic sanctions against Iran will start to have a major effect. The U.S. and its European allies have been hoping that tighter and tighter sanctions will push Iran to negotiate an agreement over the future of its nuclear program. Israel has said it can't wait forever before ordering a military strike, but U.S. officials believe that the sanctions can produce results. Here's NPR's Tom Gjelten.

TOM GJELTEN, BYLINE: Oil is Iran's lifeblood and each day less of it flows. Fifty thousand barrels less each day, according to new figures from the International Energy Agency. And the drop is a direct result of international sanctions. Not the new ones - more on those in a moment. These sanctions were put in place years ago to discourage foreign firms from doing business in Iran, supplying new technology for oil ventures there, for example. Trevor Houser follows the Iranian oil business for the Rhodium Group in New York.

TREVOR HOUSER: And those sanctions were successful. It's been very difficult for Iran to attract investment in the oil sector and so overall production is declining.

GJELTEN: With the price of oil rising, Iran can sell less and earn the same money. But now it has other problems. The new sanctions target Iran's banking system. They make it harder for Iran to get paid for its oil. The country has alternative ways to get its money, but they're less efficient, says Cliff Kupchan of the Eurasia Group.

CLIFF KUPCHAN: The revenue to Iran per barrel of oil sold will likely drop, because the transaction costs of selling that oil are going to rise.

GJELTEN: The latest blow came last week. The international clearing house known by its initials as SWIFT disconnected Iranian banks. It'll be much harder for an Iranian bank now to send a wire transfer to a Japanese bank, for example. Again, there will be workarounds, but Trevor Houser sees big trouble for Iranian importers - the ones that bring in electronics from South Korea, for example, or clothes from Italy.

HOUSER: Dozens of small Iranian companies that have to process payments to suppliers outside of Iran. And for those small companies, the banks involved are not going to be willing to go to the effort or take on the risk of finding workaround solutions. So it's going to be much tougher for Iranian firms to import goods.

GJELTEN: That means shortages or higher prices for Iranian consumers who want foreign goods. This is how sanctions on Iran should work. They produce discontent, which so weakens the government's standing with its own people that its leaders feel compelled to make concessions and forego a nuclear weapon. Here's how James Clapper, the director of national intelligence, laid out the thinking in a Senate hearing last month.

JAMES CLAPPER: To the extent that the Iranian population becomes restive and if the regime then feels threatened in terms of its stability and tenure, you know, the thought is that that could change their policy.

GJELTEN: So far it doesn't seem the economic stress in Iran is taking the country to a breaking point politically. But U.S. officials who once doubted that would ever happen now see the regime getting nervous. Cliff Kupchan of the Eurasia Group notes that that even before last week's SWIFT sanctions, Iran was dealing with 40 percent inflation, a dramatically devalued currency, and huge budget deficits.

KUPCHAN: The SWIFT sanctions are only going to make those numbers worse. Now, when the breaking point comes, who knows. But the breaking point is more on the horizon than it's been.

GJELTEN: And the pain will only get worse. In the next few months, European refineries will be ending their purchases of Iranian oil. In last week's report, the International Energy Agency said that step could bring a new 50 percent drop in Iranian oil exports.

Tom Gjelten, NPR News, Washington.

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